No Clear Logic in Verizon’s Digital Media Venture

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AOL and Yahoo will report to Marni M. Walden, an executive vice president at Verizon.CreditCraig Lassig/Associated Press Images for Verizon Wireless

By William D. Cohan

Sept. 7, 2016

Maybe I am a Luddite. I just don’t get the industrial logic behind Verizon Communications’ recent $9.2 billion foray into the digital media “space,” especially because the way it has chosen to compete in it is by buying Yahoo and AOL, two companies that have seen much better days.

In late July, Verizon, the telephone and wireless behemoth, agreed to buy Yahoo for $4.8 billion in cash. A year or so earlier, it bought AOL for $4.4 billion in cash. The money Verizon spent is hardly material to its $220 billion market capitalization, although it is still a lot of money. And both businesses combined generate about $7 billion revenue annually.

Given that, David Gelles suggested in The New York Times that Verizon might have acquired the two companies at bargain prices, considering that LinkedIn, with annual revenue of $3 billion, was sold to Microsoft for $26 billion and that Twitter, with revenue of a little more than $2 billion, is valued by the market at $12 billion.

But these acquisitions are material in the sense that they raise legitimate questions about the judgment of Verizon’s management.

Does it still have a good handle on how to invest the nearly $50 billion in cash flow that it has generated in the last 12 months, mostly from its gigantic wireless and old-fashioned telephone businesses? Or is flailing in unknown waters in a misguided quest to get into the business of providing digital advertising, where the two biggest competitors by far are the formidable Google (market cap, $530 billion) and Facebook (market cap, $363 billion)?

Both AOL and Yahoo, when that deal closes early next year, will report up the Verizon chain of command to Marni M. Walden, an executive vice president, who is a leading contender to succeed Lowell McAdam, the Verizon chief executive, when he retires. (Mr. McAdam is 62; there is no mandatory retirement age for executives at Verizon.) Tim Armstrong, the chief executive of AOL and the man generally credited with creating Google’s online advertising sales team, appears to be the executive who will run both AOL and Yahoo on a day-to-day basis for Ms. Walden.

Ms. Walden’s future at Verizon is likely to depend on how well she and Mr. Armstrong execute on Verizon’s AOL-Yahoo strategy. At 49, she is a highflier, for sure. She was paid nearly $7 million in 2015, and along with Tami Erwin, the head of Verizon’s wireless business, she is one of only two women senior executives at the company. Verizon declined to make any of its executives available to discuss the logic of the AOL and Yahoo deals.

Instead, Mr. Varettoni pointed me to previous public comments Verizon executives have made. For instance, at the time of the AOL acquisition, Ms. Walden said, “We’ve begun the next chapter in our history where we intend to become the No. 1 global media technology company for creators and advertisers and consumers.”

“Our vision is to provide customers with a premium digital experience based on a global multiscreen platform,” she added.

She noted that AOL was a leader in “digital content and advertising platforms” and that with Verizon, the combined company “creates a scaled mobile first platform directly targeted at the global advertising industry.”

Verizon’s public relations team also pointed me to a transcript of Verizon’s second-quarter 2016 earnings call. In the call, Mr. McAdam said that thanks to the AOL deal, which also brought with it The Huffington Post and TechCrunch, Verizon has learned “a tremendous amount” about the video market and opportunities for future growth. As for the Yahoo acquisition, Mr. McAdam said Verizon saw “tremendous opportunity” in the digital video marketplace, which he said was expected to reach $180 billion by 2020.

Without naming them, he said that two brands – the aforementioned Google and Facebook — dominated the market and that Verizon intended to be “a significant player,” too. “Content creators and advertisers are hungry for alternatives as the market expands for both in-home and mobile consumption,” he said.

The Yahoo acquisition will allow Verizon to be a “major competitor” in mobile media, Mr. McAdam continued. He said Yahoo brought “market-leading content” in sports, finance, news and email and expanded Verizon’s “analytics and ad tech capabilities” and enhanced “our competitive position and value proposition to advertisers.” For his part, Mr. Armstrong told Mr. Gelles: “This industry is so big and it’s so new. People act like Google and Facebook have already won. But nobody owns the future.”

Honestly, I don’t know what any of this means. It sounds like Verizon recognizes that the growth in its wireless business, while a cash machine, has peaked and that it needs to find new opportunities. It must think it has found that opportunity by trying to take a piece of the digital advertising market away from Google and Facebook. And even if AOL and Yahoo end up with only 5 percent of the market, by 2020, that will be nearly $4 billion in new revenue for Verizon, which is still just a fraction of its $130 billion in trailing 12 months’ revenue.

When I was a Wall Street banker covering the telecommunications industry, I worked on a number of mergers and acquisitions deals for what is now Verizon: the merger of GTE and Bell Atlantic, which created Verizon; the creation of Verizon Wireless; and the sale of groups of Verizon’s wireless assets that posed conflicts for the company. I also worked on two deals that never came to fruition: Verizon’s failed attempt to buy AirTouch, a big wireless provider, and Verizon’s exploration of buying WorldCom for $100 billion, before WorldCom disintegrated. In each of these deals, I always had a clear sense of the company’s strategic direction and priorities.

But now I’m more than a little confused. Which leads me to wonder what the market makes of Verizon’s acquisition of Yahoo. Verizon’s stock hovered around $56 a share before it announced the widely expected Yahoo acquisition. These days the stock is hovering around $53, a decline in Verizon’s market capitalization of nearly $12 billion, or three times what it agreed to pay for Yahoo.

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